What is the "January effect" primarily associated with?

The January effect is primarily associated with small cap stocks showing abnormal strength. This phenomenon refers to the historical tendency for smaller companies' stock prices to increase more than those of larger companies in January, often attributed to several factors including year-end tax-loss selling, which leads to depressed prices in December. Once the new year begins, investors are more likely to reallocate their portfolios, leading to increased buying pressure on smaller stocks, which typically have lower liquidity compared to large-cap stocks. This effect suggests that small cap stocks exhibit a seasonal pattern of outperformance early in the year, making the observation of this strength particularly relevant for investors looking for seasonal trends in stock prices.